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Casual dining restaurateur, Brinker International, Inc. (EAT - Analyst Report) is set to report fiscal second quarter 2014 results on Jan 22, 2014. In the last quarter, it delivered a negative earnings surprise of 6.52%. Let’s see how things are shaping up for this announcement.

Factors to Consider

Brinker has been experiencing macroeconomic headwinds for the past few quarters. Government budget cuts, high tax rates and still-tightened credit availability continue to hurt consumer discretionary spending, which in turn lowered restaurant traffic.  

Brinker’s first-quarter fiscal 2014 results were disappointing with both earnings and revenues missing the Zacks Consensus Estimate. Sales were soft due to declining comps, which were hurt by lower consumer traffic trends. Consumer traffic declined due to a tight consumer spending environment in the U.S.  We do not expect traffic trends to improve much in fiscal second quarter 2014.

Moreover, like other restaurant chains, Brinker is also facing increasing food and beverage costs. Costs of poultry and dairy remain major concerns. Moreover, owing to different sales initiatives, operating costs are expected to go up, thus hurting margins.

Earnings Whispers?

Our proven model does not conclusively show that Brinker International is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: The Expected Surprise Prediction or ESP for Brinker International is -1.72% since the Most Accurate Estimate stands at 57 cents per share, while the Zacks Consensus Estimate is higher at 58 cents.

Zacks Rank #4 (Sell): Brinker International’s Zacks Rank #4 when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Brinker International witnessed downward movement of estimates in the past 30 and 60 days for the upcoming quarter as well as fiscal 2014. The Zacks Consensus Estimate for the upcoming quarter declined 4.9% to 58 cents over the last 30 days.

Other Stocks to Consider

Other stocks in the broader consumer discretionary sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Jack in the Box Inc. (JACK - Snapshot Report), with Earnings ESP of + 1.54% and Zacks Rank #1 (Strong Buy).

Buffalo Wild Wings Inc. (BWLD - Analyst Report), with Earnings ESP of + 0.94% and Zacks Rank #2 (Buy).

Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report), with Earnings ESP of + 1.86% and Zacks Rank #2.


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